ESG and broader financial sustainability efforts have been major industry trends in the financial services sector in the last few years, with an increasing number of financial institutions adapting to ESG standards and implementing sustainable objectives to maintain transparency and accountability as climate change continues to wreak havoc on the planet.

While many significant institutions continue to promote green initiatives whilst quietly funding fossil fuels (ahem, JP Morgan and Citi), there has been a monumental effort by international regulatory authorities to accelerate the just transition to net zero greenhouse gas emissions and guide policy towards implementing sustainable infrastructure.

The 2015 Paris Agreement provided a framework for how governments should be advancing national policy in favour of sustainable action, and the Agenda 2030 for Sustainable Development and Sustainable Development Goals was adopted by all member states of the UN as a commitment to working towards a just transition.

What are net zero frameworks in the financial sector?

The Grantham Research Institute of Climate Change and the Environment at the London School of Economics published a report, Just and robust transitions to net zero: a framework to guide national policy, that charted how policy can be formed to accelerate the transition to net zero and what needs to be put into place for net zero goals to be achieved.

The report outlined that governments have overarching ability to guide individuals, organisations, and sectors in undergoing decarbonisation through a systematic approach that can foster the environment for a robust transition.

Within the EU there are just transition measures that have been explicitly working towards net zero, such as the Green Deal strategic framework that directs the transition towards the EU’s carbon neutrality objective, and the 2022 Recommendation issued by the Council of EU that was designed to ensure that national policy integrates all sectors within their policies to form a transition that is fair and impactful.

Fiscal and social policies are a significant factor in the just transition, financial institutions can provide key investment in the transition to net zero and can be pivotal in reforming public and private finance through action and investment. To achieve maximum potential impact and create a ripple effect in the industry, financial institutions cannot only have voluntary initiatives, temporary green projects, and similar short-term solutions, they need to embrace sustainability in both the financial and non-financial to fully adapt and work towards the betterment of not only the Earth and its resources, but also for the well-being of their clients and employees.

Source: LSE

Companies that address climate change and assess their environmental impact by scope 1 emissions alone is the equivalent of sticking a band-aid on a bullet hole, the sustainable journey requires integral and consistent evolution into greener and healthier infrastructure that is not only one part of a business, but a core tenet of the business’ values.

Government policies can massively impact the sector, such as Ireland’s Climate Action and Low Carbon Development Act, which was amended in 2021, that implemented a national carbon tax on the Irish economy which the 2023 €623 million revenue was then invested into social welfare, community energy efficiency, green farming, and the Midlands Just Transition Fund among other initiatives.

According to the UN Net Zero Banking Alliance Progress Report 2022, 95% of respondents of 62 member banks that took part in the report measure their financed emissions, 32% have portfolio-wide intermediate targets for achievement by 2030, and 94% have set sector targets for 2030 or sooner. The indicators convey that that there is significant commitment from the banking sector to contribute to reducing their carbon impact, but it is evident that more progress can be made and more banks can be evaluated accordingly.

Earlier this month, the Monetary Authority of Singapore (MAS) issued banks with guidelines for net zero transition, taking a lead as a regulatory authority and prioritising decarbonisation within the Singaporean economy. The move marks how governmental policy can have a significant impact on the sector and enable genuine change. 

In the UK, the Climate Change Committee (CCC), an independent body that was formed in the 2008 UK Climate Change Act to advise the UK government on emissions reduction, recommended in 2020 a 78% reduction of greenhouse gas emissions in the UK by 2035 in order to meet net zero by 2050. The recommendations revealed that there is a talent shortage in the industry and an increasing demand for skills in the sustainability sector.

There needs to be more analysis and academic evidence involved in assessing the industry and approaching transition planning to response to policymaking and adapt to the changing nature of the industry as new developments are underway. What the CCC concluded is that there is value in forming independent organisations to focus solely on the just transition, and by continually working alongside the government they can strategise sustainable solutions and make progress towards net zero.